Game On for GameStop

By Johanna Bennett

Shares of GameStop (GME) rose as much as 10% Friday after the video game retailer beat quarterly earnings estimates and predicted continued strength in the market for the latest gaming consoles.

Sharp demand for video game consoles helped fuel a 24% rise in revenue during the second quarter. GameStop said profit more than doubled to $24.6 million, or 22 cents a share, blasting through the company’s previous guidance, on sales of $1.7 billion.

Janney Capital Markets analysts Tony Wilbe and Murali Sankarwrote:

GME continues to be well positioned to benefit from the impressive 8th gen game cycle demand (XB1/PS4) that is running 2x the prior cycle. The company is approaching peak market share (50% in the US) and is quickly developing complementary business that will soon benefit from new AAPL product launches and T’s bid for DTV. Software sales remain the key catalyst for GME, as they are needed to dispel bearish digital concerns. We are optimistic software sales will start to build with availability of new titles in 4Q15. We are modestly increasing estimates but maintain our $50 FV.

Sales of new hardware more than doubled on demand for Microsoft’s (MSFT) Xbox One and Sony’s PlayStation 4.

Sterne Agee analyst Arvind Bhatia writes:

Since the launch of Xbox One and PS4 in November last year, GME has been a key destination for these next-gen consoles as well as next-gen software. Based on data shared last night, GME continues to gain meaningful share on next-gen.

GameStop said new software sales grew 15.6% over a year ago, with strong demand for titles such as Ubisoft’s “Watch Dogs” and “Mario Kart 8” from Nintendo.

For the full fiscal year, GameStop reaffirmed its forecast per share earnings of between $3.40 and $3.70. It now projects a third-quarter same-store sales increase of between 1% and 5%.

At $42.62, the shares were up 5.2% during afternoon market action

GameStop has battled a slowdown in sales of videogames as game developers and rivals expanded software downloads and other digital offerings. The company is responding with its own electronic offerings

Credit Suisseanalysts write:

GME’s stock had pulled back recently on digital concerns and to some degree the recent NPD report. While we see some digital threats on the horizon, which may limit multiple expansions for this stock and is what partly keeps us on the sidelines, we believe Q2 results should reinforce that GME is the well positioned to enjoy the early part of this video game cycle, and participate in digital growth. The risks for GME breaking out its recent range still seem to be digital headlines, more competitive noise this holiday, and execution of the aggressive tech brands store rollout strategy.

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Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.